Growth pangs part of China's development

Business columnist

Most of us can only ever aspire to 15 minutes worth and, even then, given the nature of fame these days, may find it a less than edifying experience.

Spare a thought then for Ian Ashby. This week, he became the most powerful man in the country, possibly even the world, after a seemingly anodyne remark he made at an unremarkable metals conference in Perth thrust him into the harsh glare of international stardom.

News bulletins screaming out ''BHP executive predicts slowdown in China'' slammed the Australian dollar into reverse and stockbrokers and investors into a lather as they marked down the local exchange and then others in the region and around the globe.

Was he being reckless? Did he inadvertently provide a rare, truthful insight into an imminent catastrophe confronting the globe?

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Hardly. As BHP Billiton's head of iron ore, he did nothing more than state the bleeding obvious. And that is, while China's long-term growth prospects are underpinned by its headlong rush towards urbanisation and economic development, there is reason to be cautious about the short term.

Ashby is not the first to say this. In fact, the outgoing Chinese Premier, Wen Jiabao, went much further just a few weeks back shortly after China officially downgraded its growth prospects for this year to 7.5 per cent, the lowest level in eight years.

If anything, the Ashby experience only serves to highlight just how dependent Australia, and the global economy for that matter, has become on the prospects of a single nation that just 20 years ago was considered an aggressive military opponent and an economic backwater.

And it just goes to show how twitchy global financial markets become whenever China is mentioned. That's understandable, given the funk into which Europe has descended and the still only tentative signs that America may be emerging from the economic black lagoon.

No one wants the lights to go out, or even blink, in the one region with any sign of growth.

It was timing, rather than his speech, that thrust Ashby into the limelight this week, delivered just as debate began raging behind closed doors about whether the China phenomenon was suffering a mild setback or whether its economy was running off the rails.

A report in the latest issue of The Economist captured the mood, headlined ''Fears of a Hard Landing''.

Since 2008, China has been the saviour of global capitalism, its disciples pointing to a never-ending growth path that would lead us all onto a higher economic plane with an insatiable appetite for resources, the kind of materials that Australia has.

But economic development and economic growth is never linear, particularly in a country so ethnically and geographically diverse and large as China. And given the breakneck speed with which the country has grown in the past decade, it would be a naive forecaster who would assume this would be a sustainable trend.

The writing has been on the wall for months that China was encountering difficulties. But last week it notched up a massive monthly trade deficit - a rare occurrence in a country regularly accused of undermining global trade by amassing whopping surpluses.

The $US35 billion trade deficit for last month was the biggest on record and more than wiped out the previous month's surplus.

The reason is obvious. Europe, China's biggest market, is no longer buying as much. China, on the other hand, is still importing the raw materials needed to fuel its vast steel industry, now driven by massive plants that never sleep.

Further evidence of a downturn seemingly was confirmed on Thursday when an important indicator of manufacturing activity dropped for the fifth month in a row. That added weight to those peddling the China meltdown scenario and further spooked nervous screen jockeys.

So, are we on another precipice? Will China have a hard landing and take the global economy with it?

There is insufficient evidence to support that theory.

What is clear is that, as China's economy develops and becomes more mature, it will begin to behave more like a developed economy with slower, more manageable and sustainable growth rates. It will also become more difficult to direct and more complex to read, placing greater pressure on Chinese leaders to let the currency settle at its own natural level.

Just as Western economies occasionally go into reverse, China too will be susceptible to bouts of recession.

For the time being, however, that is unlikely. Most of China's growth has been fuelled either by its exports - making it vulnerable to the economic winds blowing through the developed world - or through massive investment programs.

Personal consumption is low and savings rates are high. While that frugal attitude has aided development, it is unlikely to remain that way for much longer. As its citizens become wealthier, they will spend more, and the economy is likely to be driven more by internal factors, a welcome development.

There is no doubt Beijing is confronting economic headwinds. Last year, in an effort to ward off a looming inflation storm, it tightened up on lending and credit. Now it suddenly is faced with a possible slowdown. But at least it has the monetary firepower to spur demand.

If economics is a dismal science, it is because it is a study of human behaviour. Irrational and unpredictable as individuals, group behaviour can be impossible to predict. On a macro level, economics is often about ebbs and flows and about the natural balancing of things.

Even now, its detractors accuse China of stealing manufacturing jobs from the West. That is true, largely because Western companies established a presence there and then repatriated the profits back home.

Those same companies are now having second thoughts. The price of Chinese labour, once the great attraction for the West, is rising rapidly, so fast that within a few years the Middle Kingdom will begin to lose what economists refer to as its ''comparative advantage''.

That may be a boon for employment prospects in the West. But Western governments, and their consumers, who have been showered with cheap goods from China, and therefore low inflation, may find that is no longer the case.

The latest data emanating from Beijing indicates China is growing up, not that it has stopped growing.

It is also worth pointing out, given everyone missed it, that Ashby detailed a multibillion-dollar expansion plan on Tuesday for BHP's Australian operations to feed China's growth. He's taking the long view.